High-rise risk

The fate of 8 Washington, a luxury high-rise project planned for San Francisco’s northern waterfront, remains uncertain after landing at the center of a political firestorm last year. Yet a whopping $42 million, invested by the California State Teachers Retirement System (CalSTRS), is currently tied up in the project.

Months from now, in the November 2013 election, San Franciscans will vote on a building height-limit variance crafted for this particular development. If the variance goes down, the luxury development – in spite of winning entitlements last June with an 8-3 vote[1] of the Board of Supervisors – will be toast. That outcome could jeopardize CalSTRS’ $42 million contribution, and some retired teachers are beginning to ask questions.

“We have been watching with particular concern what appears to be an incredibly risky investment by CalSTRS,” four retired CalSTRS members from San Francisco wrote in a letter to the pension fund’s investment committee last October, requesting information about how project developer Pacific Waterfront Partners had made use of the funds.

Investment amount increased

In response to the teachers’ request for information, CalSTRS indicated that the investment committee had actually increased its contribution up from $31.7 million last March, when final project approval seemed imminent.

The CalSTRS investment committee added the project to its investment portfolio in 2006 with an initial $26.7 million commitment. Prior to that, the pension fund had partnered with Pacific Waterfront Partners in a different venture to refurbish San Francisco Piers 1 ½, 3 and 5. That development was well received by the community, and since CalSTRS earned a healthy return on investment, the 8 Washington project seemed like a safe bet at the time.

But now that it’s frozen for months and faces possible reversal, pressure is mounting on the CalSTRS investment committee.

Earlier this week, a Change.org petition[2] created to ask the CalSTRS board to reconsider its investment garnered 150 online signatures in the first 24 hours. The online petition website lists the initiator as “Lorraine Honig, Retired Teacher,” but could just as easily read No Wall on the Waterfront, the name of the opposition campaign created last year to amass signatures for a voter referendum on 8 Washington. Honig and several retired teachers initially queried the pension fund’s investment committee in league with Jon Golinger, a key driver behind No Wall on the Waterfront and chairman of the Telegraph Hill Dwellers, a neighborhood organization.

Honig, who is actually a retired social worker, explained that she used to be a member of the Golden Gateway Tennis and Swim Club, a community fitness center that would be razed to make way for 8 Washington. She’s since moved away from the neighborhood, but feels the planned 8 Washington waterfront housing complex is the wrong kind of development for San Francisco.

“The thing I object to is, it’s high end luxury housing,” she said. “There’s nothing that’s going to cost under a million. A lot of it is going to be absentee owners.” As for the CalSTRS investment, Honig said she felt worried: “I’m concerned that our money will be used to influence the voting.”

Funding used to counter signature gathering campaign

CalSTRS’ response letter also revealed that project developer Pacific Waterfront Partners had used nearly $31,000 to counter No Wall on the Waterfront’s efforts to gather enough signatures to qualify for a referendum. An expense roster showed that funds were used to cover graphic design, flyer printing, legal and compliance advice and “outreach personnel” costs.

A flurry of news reports from last July, however, indicated that some “outreach personnel” did no more than stand on the streets and physically block signature gatherers from asking passersby to sign the petition against 8 Washington. According to one account[3], when a signature gatherer approached project principal Simon Snellgrove to complain about this behavior, he responded: “That’s their job.”

At the end of the day, Pacific Waterfront Partners' $31,000 expenditure to try and derail No Wall on the Waterfront’s bid for the ballot is decimal dust compared with the full investment in a building that has not been constructed, and may never be.

CalSTRS spokesperson Michael Sicilia declined to offer comment to the Guardian, instead pointing to the CalSTRS letter of response to its members. That letter stated in part: “CalSTRS is optimistic that the successful development of the underutilized space along the San Francisco waterfront will provide benefits to CalSTRS members in the form of investment income, as well as many direct benefits to the neighboring community and the city.”

So far, CalSTRS has not provided documents in response to a public records request submitted by the Guardian seeking more information about the investment. And neither CalSTRS nor Pacific Waterfront Partners has answered questions about just what would become of that significant investment if the project were ultimately killed. When we put this question Pacific Waterfront Partners spokesperson PJ Johnston, he responded: “I certainly would not speculate on what happens after the outcome of the election.”

How is the money being spent?

All of this leaves some open questions. Will that investment be washed away if voters effectively reject the project? Is the rest of the money still sitting in Pacific Waterfront Partners’ accounts, or was it eaten up by pre-construction costs? Is Snellgrove’s firm biding its time until November, when some of the funding can be tapped as a war chest to respond to No Wall on the Waterfront’s ballot referendum with an oppositional blitzkrieg?

“I don’t have a breakdown of their investment costs,” Johnston told the Guardian when posed with questions about how the funds had been used. “All pre-development phases require funding,” he added, referencing environmental impact studies, permitting, and other pre-construction hurdles that major developments must clear. “This process was drawn out over a number of years.”

Johnston also criticized the No Wall on the Waterfront campaign, saying, “A small band of corporate and really, really rich neighbors have put this on the ballot.”

And the project opponents who have deep pockets know a thing or two about investment, Golinger suggested in a letter to CalSTRS. He wrote, “The supporters of No Wall on the Waterfront who have experience with institutional investing warn that some money managers resist learning from their mistakes and, instead, double down on them, trying to prove they were right all along. The beneficiaries of the funds with which you are entrusted are sensitive to warning signs … that may be happening here.”

CalSTRS is the nation’s second largest pension fund and a source of financial support for retired educators throughout the state. About 70 percent of the money used to provide benefits is derived from investment income, and the $152.1 billion pension fund had $21.8 billion invested in real estate[4] as of July 2, 2012. The Sacramento Bee reported[5] earlier this week that the pension fund faces a $64 billion deficit, and would need $4.5 billion per year to become fully solvent.

Uncertain outlook

With the fate of 8 Washington now hitched to the unpredictable forces of San Francisco politics and voter sentiment, this luxury high-rise investment looks far riskier than it likely did when Pacific Waterfront Partners approached CalSTRS' investment committee years ago.

On a broader scale, there are signs that higher-risk investments are becoming problematic for pension funds across the board. An academic study[6] released by researchers from Yale University and Maastricht Univeristy in the Netherlands tracked public pension systems in the U.S. and elsewhere, and determined that major U.S. funds like CalSTRS are trending toward higher risk investments[7].

“Gradually, U.S. public funds have become the biggest risk-takers among pension funds around the globe,” the authors concluded. “A major worry is that their increased risk-taking is reckless and could lead to substantial future costs to taxpayers or public entities if their more volatile risky investments fail to meet the expected rates of return.”

At this stage of the game, it’s too soon to say whether CalSTRS’ investment in 8 Washington will ultimately become a statistic backing up that worrisome finding. Early polling results[8] from David Binder Research showed that voters would likely reject the height-limit increase by 56 percent. But November is still many months away.